Hard to Take a Bone from a Dog

Most people, provided they have a minimum of experience, know that taking
a bone from a dog is a risky proposition. In terms of political power, few
dogs are bigger than the American voting public. Taking away, or even threatening
to take away, the major entitlements to which they have become accustomed could
expose politicians to a mauling at election time. As the American leadership
begins to grapple with very large issues of entitlement reform in "sacred" programs
such as Medicare and Social Security, many may recoil from the task once the
fangs begin flashing.

According to polls, 77% of Americans feel the U.S. Government must cut spending.
But when it comes to specifics, the support melts away very fast. Until recently,
the strongly Republican 26th District of upstate New York had elected only
three Democrats since the Civil War. But in a special election held this month
(to replace the resigned Republican Chris Lee) the district fell to the Democratic
column for the fourth time in 150 years. Many have theorized that the political
upset was based on fears that the budget plan put forward by House Budget Committee
Chairman Paul Ryan would restrict entitlements, particularly Medicare.

If there is any truth to this, it shows how difficult the process may be for
politicians who want to seriously trim the Federal budget. But any glance at
the enormity of the problem should provide the necessary courage. This assumes,
of course, that there is any courage at all left in Washington.

Currently the U.S. Treasury has public debts of some $14.3 trillion and is
pleading, and in fact coercing, Congress for a debt limit increase. But given
are already abysmal situation, additional debts should not be considered.

According to the U.S. National Debt Clock, unfunded obligations such as Social
Security and Medicare etc., total some $114 trillion -- or more than eight
times the size of the annual Gross Domestic Product of the entire nation. Divide
this figure by the number of households, approximately 115 million, and you
come to the startling realization that each American household is liable for
nearly $1 million. Add in another $54.9 trillion, which is the total debt held
by all levels of government in addition to all business and household debt,
and you begin to get an idea of why the future looks bleak.

To finance their spending, governments traditionally levy taxation and incur
debts. But excessive taxation carries electoral risks. On the other hand, excessive
debt risks a severe, even ruinous flight from government debt securities and
skyrocketing interest rates. This is exactly what Greece is now beginning to
suffer, despite massive compulsory support from the EU, ECB and the IMF.

But there is a third, decidedly stealthier method that governments are tempted
to use. In the past, it was to dilute the gold or silver content of their coins.
But with the advent of paper currencies, debasement merely requires printing.
All that's required today is a stroke of a computer key.

Because the U.S. dollar is the international reserve currency, the Fed has
been able to camouflage its debasement for decades. Given that many nations
are obliged to buy dollars to manage their currency valuations, excess liquidity
in the U.S. flows quickly offshore where it's pernicious effects fall on other
nations. Recent news from China, where the government is struggling to contain
inflation while civil unrest flares, confirms this hypothesis. Too much more
of this and the dollar's reserve status will be placed in greater jeopardy.

Clearly something has to be done to cut government spending or America's debt
crisis will result in a sudden collapse of the once mighty U.S. dollar. The
key question, though, is how to persuade politicians to take the necessary
actions when doing so could spell electoral defeat?

The answer is patriotism and an informed population. Only if politicians begin
once more to put their country before their party and political careers will
it be possible to avert a catastrophic currency collapse. This process must
begin with a candid acknowledgement of the facts. America is in dire economic
straits and increased hardship in the short-term is both necessary, and ultimately
unavoidable, if we are to get back on the path to prosperity. Like Churchill
in May of 1940, politicians need to deliver the ugly truth and prepare voters
for the inevitable pain.

Only by enacting massive reforms of major entitlements, which includes cuts
to Social Security and Medicaid benefits, and reductions in military and domestic
spending, will America be enabled once more to balance its books, generate
real wealth, and issue sound currency.

But given all that we know of how politics works in America, how many elected
officials will grab the bone from the dog's mouth and pull? Regrettably, I
can't assume many are up for the challenge. As a result, we must assume the
worst for the U.S. dollar.

John Browne is the Senior Economic Consultant for Euro Pacific
Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament
who served on the Treasury Select Committee, as Chairman of the Conservative
Small Business Committee, and as a close associate of then-Prime Minister Margaret
Thatcher. Among his many notable assignments, John served as a principal advisor
to Mrs. Thatcher's government on issues related to the Soviet Union, and was
the first to convince Thatcher of the growing stature of then Agriculture Minister
Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously
pronounced that Gorbachev was a man the West "could do business with." A graduate
of the Royal Military Academy Sandhurst, Britain's version of West Point and
retired British army major, John served as a pilot, parachutist, and communications
specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military,
John has a significant background, spanning some 37 years, in finance and business.
After graduating from the Harvard Business School, John joined the New York
firm of Morgan Stanley & Co as an investment banker. He has also worked
with such firms as Barclays Bank and Citigroup. During his career he has served
on the boards of numerous banks and international corporations, with a special
interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co.
and the former editor of NewsMax Media's Financial Intelligence Report and
Moneynews.com. He holds FINRA series 7 & 63 licenses.